Market regulator Securities and Exchange Board of India (SEBI) is planning to provide protection on capital or a safety net to small retail investors by next month to safeguard part of investments made in an Initial Public Offer (IPO).

“Often retail investors invest in an IPO at a certain price and by the time the stock gets listed in the capital markets, the share falls,” said an investment banker of an international fund house that also invests in Indian capital markets. “Retail investors are the ones who do not have mechanism to do background check of an IPO and so the rationale is that they should be protected through a mechanism to limit their losses.”

So, if the retail investor has bought a share for R100 prior to the IPO, and if the share price falls to R70 per share, the investor would get some protection on the R30 that he has lost per share. In such an event the company would be made to pay part of the investment to the retail investor.

The safety net was discussed by SEBI in its August 16 meeting, but the proposal was not passed. Many investment bankers have raised objections to such a provision. After the board meeting, SEBI chairman U K Sinha said further consultation is required on the issue, and a final view would be taken accordingly.

“The share price of a company is a function of the company’s performance and several other macro economic scenarios. Safety net mechanism ignores these basic facts,” the investment banker said.

There is an alternate view in SEBI that retail investors do not have resources to check whether an IPO is aggressively priced or not, unlike qualified institutional investors, including investment bankers, thus backing the idea of a safety net.

SEBI is pushing for the safety net as it could bring more retail investors into the capital market by limiting their losses in a fresh offering. The safety net could have conditions such as a stipulated period, the percentage of fall and minimum number of shares covered. Specifics are still being discussed by SEBI.